BUS601: Financial Management

1a. Recognize the role of accounting and finance in a business

• What are the differences between financial accounting and managerial accounting?
• Who are the principal stakeholders of a corporation?
• What are the three primary responsibilities of management?

Every business enterprise spends a considerable amount of time reviewing the 'numbers'. Suppose you step back and look at the sources of money (revenue, interest payments, etc.) and how the business allocates its money (expenses). In that case, there will be dozens or even hundreds of accounts to analyze. When all the firm's financial transactions have been identified, they provide a picture of the firm's activities and how well they are performing to expectation.

Two primary audiences are interested in the financial performance of a business. The internal audience consists of executives, department heads, managers, and employees. This group uses the financial data to prepare budgets, evaluate investments, plan payrolls and operating expenses, and track the results of their efforts, and are the customers of managerial accounting. There is also an external audience that is interested in financial performance. This group consists of shareholders, government agencies (IRS), debt holders, and others, who do not want to see the fine details of each category but rather a summary, and these individuals are interested in financial accounting reports.

A business will have responsibilities to various stakeholders, depending on size and whether it is a private or public firm. Stakeholders are any parties interested in following the financial performance of a business and who rely on this information to make decisions. For a publicly-traded firm, shareholders are those who have acquired stock in the company and are interested in getting a return on their investment. But there are other interested parties as well. These can include employees and management (internal), government agencies (SEC, IRS), institutions holding the firm's debt, customers, local communities, and others. A principal responsibility of any company is to act in a way that meets or exceeds its stakeholders' expectations.

Whether a firm is large or small, management has three primary responsibilities: planning, controlling, and evaluating the business' decisions. Planning involves setting the goals and objectives of the company and usually includes a business plan and a strategic planning initiative. The controlling activity focuses on ensuring that the business is on track to achieve the desired results or take corrective action if not. Finally, evaluating involves a constant review of performance to help the firm achieve its financial goals for all stakeholders.

To review, see:

• The Role of Accounting in Society
• Accounting as a Tool for Managers

 

1b. Describe the accounting system

• What do you consider to be some of the critical functions of accounting?
• There are both internal and external users of the information that accounting reports on. What are examples of the customers from each group?
• Why is the application of Generally Accepted Accounting Practices (GAAP) important for public firms?

Simply put, it is the responsibility of accounting to identify and report on every financial transaction that the firm has. This includes all expenses necessary to support the business and all sources of revenue. Accounting tracks these transactions and reports all this activity to management on a regular basis, such as weekly, monthly, quarterly, etc. But there is more than just reporting on the numbers. A substantial amount of analysis is done so that the reports generated help management evaluate progress, identify opportunities and challenges, and make business decisions.

Consider the following examples of the information that the management team will be interested in:

• Actual expenses versus budgeted expenses;
• Sales activity, both historical, current, and projected;
• Amount of debt being held;
• The status of both receivables and payables;
• Profit margins on the sales of key products and/or services; and
• Tax liabilities.

It is also worth remembering the various users of this accounting information, including internal customers, external customers, and government entities. Understanding the responsibility and demands of the accounting function is one of the critical requirements for business.
 
To review, see The Role of Accounting in Society.

1c. Explain each statement in the corporate financial package

• What is the purpose of each statement contained in a firm's financial report (income statement, statement of retained earnings, balance sheet, and statement of cash flows)?
• What are two or three key pieces of information that a business owner or a firm's executive can get from each of these statements?
• What is the purpose and value of an independent audit?

The owners and managers of a business will spend a considerable amount of their time reviewing, analyzing, and evaluating the business' financial performance. The starting place for this activity is the firm's financial statement, which will include:

• an income statement (also known as the profit/loss statement) that reports income coming into the firm from all sources, expenses incurred by the business, and the resulting profit or loss from these activities.
• a statement of retained earnings that records the amount of earnings that the firm will retain (not return to shareholders) to continue business operations.
• a balance sheet that details the firm's assets (what is owned), liabilities (what is owed), and the difference, representing the amount of equity due to shareholders.
• a statement of cash flows that shows how cash is coming into or leaving the company due to operations, investing, and financing activities.

Each of these statements is an important part of describing the business' financial status. Each one provides specific information critical for evaluating how well the business is doing and if there is a need for some corrective action.
 
To increase the value of this information, it is usual for the financial package to compare the current results with the historical performance (last month, last quarter, etc.) and the firm's budgeted financials. This process produces a variance report that shows the current results as greater than, equal to, or less than the prior period or budget. This analysis can provide management with a great deal of information about the business and is the basis for creating various management reports that departments can use within the firm to chart their progress.
 
To review, see:

• Introduction to Financial Statements
• The Purpose and Content of an Independent Auditor's Report

 

Unit 1 Vocabulary

This vocabulary list includes terms you will need to know to successfully complete the final exam.

• balance sheet
• control (management responsibility)
• evaluate (management responsibility)
• external users
• financial accounting
• financial activities
• financial statements
• financial transactions
• income statement
• internal audience
• managerial accounting
• plan (management responsibility)
• shareholders
• stakeholders
• statement of retained earnings
• statement of cash flows
• variance report